The North American Free Trade Agreement (NAFTA) incorporated the investor-state dispute settlement (ISDS) provisions that the United States has typically
included in its trade and investment agreements. In contrast, its replacement - the U.S.-Mexico-Canada Trade Agreement (USMCA) - significantly curtails the opportunities for investors to bring investment claims. Its ISDS provisions will only apply to Canada for three years, limited to claims arising under NAFTA, and to five sectors for investor disputes involving the U.S. and Mexico. This post considers the USMCA’s pared-down ISDS provisions, particularly in light of the new approach that the European Union is incorporating in trade agreements, with the aim of converting it to a multilateral system.
The USMCA limits the ability of an investor to submit a claim for arbitration to two situations: legacy claims and U.S.-Mexican disputes in specified sectors. The first allows investors to file claims for arbitration involving “legacy investments” that arise under NAFTA. The Agreement defines a “legacy investment” as an investment that was established or acquired during the life of NAFTA -- between January 1, 1994 and its termination -- and that existed when the USMCA entered into force. This provision, which expires three years after NAFTA is terminated, is the only investor-state dispute claims provision that applies to Canada. (The Agreement also clarifies that arbitrations that are initiated on investment claims before NAFTA is terminated may proceed to their conclusion.)
Mexico and the U.S. agreed to make the traditional investor-state provisions available to investments in just five sectors: oil and natural gas (ranging from exploration to sale); power generation services, telecommunications services; transportation services; and the ownership or management of infrastructure, such as roads, railways, bridges, canals and dams.
While U.S. firms will lose the opportunity to take investment claims in Canada to international arbitration, ISDS protections will be available between Canada and Mexico since both are party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which contains similar provisions.
Unlike the limited approach to investor-state claims in the new NAFTA, the EU is incorporating a bilateral investment court system (ICS) in its trade agreements in place of the traditional ISDS and is working on development of a multilateral investment court, which would replace the bilateral courts.
Canada signed on to the bilateral ICS in its trade agreement with the EU, the Comprehensive Economic and Trade Agreement (CETA), implemented a year ago. Mexico, too, in its recently concluded agreement with the EU agreed to the ICS. The ICS has also been incorporated in EU agreements with Vietnam and Singapore and will likely be included in trade deals under negotiation with Australia and New Zealand.
The EU is engaged in development of a multilateral investment court, which would replace the bilateral investment court systems as well as the ISDS systems in its older trade and investment agreements. Both CETA and the EU-Vietnam agreement include a reference to a potential permanent multilateral mechanism. In March, the EU member states gave the European Commission a
mandate to negotiate a multilateral investment court. At the EU's instigation, a working group in the United Nations Commission on International Trade Law (UNCITRAL) is taking up ISDS reform.
In contrast to the EU’s pursuit of a new comprehensive approach to investor-state dispute settlement, the U.S. - in the first agreement negotiated by the Trump administration - is cutting back on investor dispute settlement and even omitting one of the USMCA’s parties. With respect to ISDS, the USMCA cannot be said to meet the administration’s claim that it represents “
a 21st century, high-standard agreement”.
Jean Heilman Grier
October 17, 2018
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